The UK’s job market has emerged as a significant success over the past twenty-five years, with the unemployment rate averaging 5.5% since the early 2000s, a decrease from the 6.4% seen in the previous four decades. Currently, the unemployment rate is only 4%. Furthermore, the inactivity rate, which reflects the percentage of working-age individuals neither employed nor seeking work, stands at 21.8%, notably lower than its 50-year average of 23.1%.

As the chancellor prepares for the upcoming budget, it is likely that she will use various metrics to support her claims about the economic challenges the country faces since World War II; however, labour market statistics will likely not be among them.

The reality is that the UK’s economy has effectively functioned as a job-creating mechanism under both Labour and Conservative administrations.

This resilience in the job market may explain why the current government feels empowered to implement increased taxes and regulations. It seems employers are viewed as those with the capacity to absorb more burdens, as noted by Prime Minister Sir Keir Starmer, who referred to them as having the “broadest shoulders.”

The concern arises that a new government, eager to expedite reform and address tax deficits, might overburden employers precisely when the market is on the verge of experiencing significant shifts due to emerging technologies like generative AI. Undermining a sector that has been a strong performer would not bode well for the Labour Party.

It is crucial to recognize that the intentions behind reforms in the UK labour market are commendable, and each can stand on its own merits. However, feedback from private sector employers often highlights not just the merits of individual reforms but their collective impact. So, what changes are being proposed?

Firstly, the national living wage has seen an increase from £7.20 per hour in 2016 to an anticipated £12.10 per hour by next April. This shift means that it now represents 66% of median earnings, up from 55% six years ago. Additionally, the lower rate of the living wage for those aged 18 to 20 is set to align more closely with the higher rate, posing greater challenges for employers, particularly in lower-income regions like the northeast and East Midlands compared to London and the southeast.

Secondly, the government’s recently introduced Employment Rights Bill includes 28 specific measures aimed at combating unfair employment practices. Proposed changes include abolishing zero-hours contracts, expanding eligibility for statutory sick pay, and strengthening day-one rights. While framed as a strategy to enhance growth and productivity, employer groups express caution about how these changes will affect the delicate balance of responsibilities between employees and wage-paying companies.

Thirdly, there have been stricter eligibility criteria for skilled visa applications. Since early 2024, new salary and dependent restrictions have been imposed, resulting in a 38% decrease in applications during the third quarter from the previous year. This change significantly hampers employers’ ability to access necessary skills promptly.

Fourth, the forthcoming budget is expected to announce an increase in employer national insurance to bridge budgetary gaps, with an estimated 1p rise potentially raising £9 billion annually. Research indicates that such increases are often passed on through reduced pay increases or higher prices, but many employers may find this difficult given recent economic pressures.

Additionally, the government aims to increase pension contributions to ensure that future retirees can save adequately for their retirement. Although the details are still under discussion, employers are likely to be asked to contribute significantly to enhanced pension accrual rates.

Overall, while each of these five proposed reforms aims to address in-work poverty, secure employment, trust in the migration system, funding public services, and ensure dignity in retirement, there is a valid concern about overwhelming employers. This influx of changes comes at a time when businesses are already grappling with higher energy costs, fluctuating consumer demand, and challenging business rates.

Political advisers might advocate for rapid change amid short political cycles, but it’s critical for those in the Department for Work and Pensions and the Treasury to consider whether excessive reforms, without proper evaluation of their cumulative effects, could lead to a slowdown in hiring.

Job vacancies have already dropped by nearly half a million from their post-pandemic peak, leaving little room for complacency. Fortunately, work and pensions secretary Liz Kendall has an adept Labour Market Advisory Board to provide insights, despite a notable lack of representation from private sector employers. Well-meaning reforms in the job market risk failing if the demand for workers diminishes, as enhanced employment rights mainly benefit those already employed.

As private sector employers adapt swiftly to generative AI, the job landscape across various sectors, including professional services, retail, and creative industries, remains uncertain. Implementing additional reforms and taxes on one of the UK’s most successful sectors carries significant risk.

Simon French is the chief economist and head of research at Panmure Liberum.